3.01.2024
Yesterday felt consequential, though not exactly super. If tomorrow’s state of the union speech doesn’t rhyme a little with Carter’s 1979 malaise sermon, it will feel like wasted air. No matter what the indicators say, there’s a crisis of confidence, which has once again created a political vacuum, but more on that in a second…
Economic bellwether Target (TGT) soared 12% on news of its first revenues decline in seven years, while Bitcoin jumped to a record only to immediately fall almost 10% (some currency!) while gold hit a new record. Meanwhile, Tesla continued its 2024 nosedive, the stock is off almost 30% since January 1st, as fellow Mag7’s Alphabet/Google and Apple falter. (Google’s Gemini chatbot is officially a bust and the Apple Car is a no go.)
Our new portfolio iteration, the so-called Roaring Twenty, have not roared this year, though they’ve done well enough to maintain the portfolio’s annualized returns since October 2020 at around 28%. Which ain’t bad, folks. Seriously. I’m not kidding…
What might all of this mean? Because of the stock market’s latest bull run, some people have more money than sense right now, but they’re not spending it. Maybe they’re pissed off about inflation and waiting for lower prices (good luck!) or perhaps they’ve read that the federal government is borrowing a trillion dollars every four months just to run in place and that makes them nervous? Or maybe they bought everything they wanted and needed during the post-Covid binge? I don’t know.
But the rally is now running on hopes (Target will run out a new membership program, like Costco’s!) and fumes (AI), but stocks ultimately price based on anticipated future cash flows, which is a lesson that a lot of people are about to learn. You know, like they did should have when the tech-heavy NASDAQ Composite when nowhere from 2001-2015…
Another hard truth: there may be no easy money pill/token but there are plenty of side effects. Yes, people want to be richer and skinnier and work less, thus we have crypto and Wegovy et al and AI, but these all have more negatives than positives at the moment, which explains why we keep having to borrow more and more money. The payoff is always coming…
Also yesterday: news out of Asia made it pretty clear that nearly all of the globe’s economic growth this year (maybe all of it) will be concentrated in China, India and a couple of Southeast Asian countries, which are proxies for the China, as is Mexico lately. Theoretically, the US should be tying its proverbial wagon to China; instead we’re bailing on them and questioning their motives, so trade between globe’s two largest economies is evaporating. Therefore falling trade is now touted as a positive by the current Administration—even though the same government predicts that the US economy will barely grow at all this year, which is a problem when both the debt and the interest paid upon it are skyrocketing.
Will there be a math lesson tomorrow night? I doubt it.
In desperation, private equity giants are reportedly selling overleveraged companies with few prospects, aka zombies, to one another now. As Ben Graham observed eight decades ago, Wall Streeters do nothing so well as one another’s laundry, but a little something is lost in the wash every time, at least for investors. The laundry isn’t free unless you do it yourself.
As Ecclesiastes observed, There is nothing new under the sun. More to the point, There is a season and a time to every purpose under Heaven. So let’s turn, turn, turn to the season at hand, shall we? Now is neither a time to sow or reap but rather a time to forage more wallflowers and cigar butts. But where, exactly?
This year I’ve already trawled the small-cap benchmark S&P 600 as well as the London and Australia stock markets. My brief foray into the pink sheets, where public companies are either on a time out or (more likely) out of time has proven an utter waste of time, unless I needed to relive the ghosts of markets past, the oh so many “sure things,” e.g. cannabis, blockchain, IoT, SPACs, clean energy, and on and on and on. I didn’t. I assumed that time and interest rate hikes had not been kind to those who run on fumes and ideas, aka hopes and prayers.
I was correct.
So where to trawl? Well, Warren Buffett’s bet on homebuilders is looking prescient this morning, and the UK, still a believer in fiscal restraint, is about to cut taxes. And China probably will manage to pull off its 5% growth rate this year, even with The Wall Street Journal dunking on them daily, while Japan, its most important trading partner now, probably will ride its coattails. As far as macro ideas, that’s all I got, and I would not bet on any of them. Decisions will be made on a company by company basis, as usual. Here comes the slog.
The good news is that the market probably won’t crash, that’s just the percentage shot, not a prediction; the bad news is that investors can no longer rely on thoughtlessness (themes) and passivity (index funds), even though they’ve been conditioned to both. Like the rest of us, they’re gonna have to do some homework. The industry won’t do it for them, though it will sort the laundry into neat little groups: growth, value, innovation, high yield, emerging markets, whites, coloreds, blah, blah, blah…
The really good news is that intelligence should still work, maybe even better in such a dumb, scary environment. Receipts:
1. DVA
Way back in the fall, dialysis provider DaVita (ticker DVA) plunged on news that a European Ozempic trial was showing progress against kidney disease. DVA was then a member of our portfolio, so I felt compelled to write that the market had overreacted in typical (though extreme) form, making DVA an even bigger bargain. Those who agreed with me back then enough to buy the stock are now up more than 80% in about five months—or 100% annualized.
2. AMZN
In May of 2021, a subscriber asked me to value three stocks, only one of which had sufficient history to do so with confidence: Amazon.com (AMZN). Amazon, I wrote back, had a quantitative value (QV) of $180 (split adjusted). Since then, AMZN has plunged and then reversed direction, nearly hitting my QV estimate last week. Had this subscriber waited for AMZN to hit $120, the point at which it would have achieved its requisite margin of safety, he would have made a 45% return in the past 20 months. an annualized return of 25%.
Both seem like acceptable returns, to me at least.
Still I’m not looking forward to the rest of the year, particularly the Biden-Trump rematch that guarantees four more years and maybe FOMO years as well as the brakes slam on the economy and then on the stock market, provoking more and more investors into gold and crypto and unprofitable AI stocks or real estate or some other yet-to-be confabulated dollar vortex. But the above examples, which are real world and time stamped and not cherry-picked (AMZN is the one stock that I have ever definitively valued for a subscriber, while DVA was the only “buy the dip” quasi-recommendation that’s ever appeared in the newsletter) do give me hope that rougher waters ahead may be navigated successfully. Id est, fortune does not favor the brave or the bold nearly so much as it does the prepared and the patient, i.e. the intelligent.
Antoine de Saint-Exupery: “What saves a man is to take a step. Then another step. It is always the same step, but you have to take it.” So onward we go..